Companies in the U.S lag behind their international counterparts when it comes to comes to informing shareholders of their process for director self-evaluations, the Council of Institutional Investors says in a new report that urges improved disclosures on that front.
“While most major U.S. companies have a self-assessment process for the board in place, their proxy materials often merely state this fact without elaborating on what the process entails,” the report, entitled “Best Disclosure: Board Evaluation,” says.
“When making voting decisions about directors, shareholders value detailed disclosure of the board evaluation process—how the board goes about evaluating itself, identifying areas for improvement, and addressing them—as a window into the boardroom,” it adds. “While shareholders generally do not expect the board to discuss the details of individual director assessments, they want to understand the process by which the board goes about regularly improving itself.”
This is particularly important because “over time, a board may become complacent or may need new skills and perspectives to respond nimbly to changes in the business environment or strategy,” CII says, adding that disclosures about how the board evaluates itself, identifies areas for improvement and "provide a window into how robust the board’s process is for introducing change.”
Among the information shareholders want and deserve, according to CII, is an explanation of who does the evaluating of whom, how often each evaluation is conducted, who reviews the results, and how the board decides to address the results. Discussing the “nuts and bolts” of the self-assessment process can illustrate how the board identifies and addresses gaps in its skills and viewpoints.
General Electric is cited in the report as one of the few U.S. companies that provides a thorough disclosure of its board evaluation process. Its disclosure focuses exclusively on the mechanics of how the evaluation is conducted, without venturing into the results or findings from previous evaluations. The detailed explanation of the evaluation process is included in the company’s “Governance and Public Affairs Committee Key Practices” document, which is separate from the proxy statement. GE’s proxy statement includes a brief high-level overview of how the process is conducted and provides a link to the document where a more detailed explanation can be found.
CII recommends that self-evaluation disclosures go beyond a detailed discussion of the board’s evaluation methodology to also include a discussion of “big-picture, board-wide findings and any steps for tackling areas identified for improvement.” This approach focuses on the most recent evaluation and recaps key takeaways from the board’s review of its own performance. This evaluation includes a discussion of areas where the board feels it functions effectively, areas where it thinks it can improve, and a plan of action to address these matters. Uncommon in the U.S., these evaluation-specific disclosures are most common in the United Kingdom, Europe and Australia.
CII is a nonprofit association of pension funds, other employee benefit funds, endowments and foundations, with combined assets that exceed $3 trillion. It promotes itself as “a leading voice for effective corporate governance and strong shareowner rights.”